Ben Bernanke has weighed up the evidence and looks to have decided that, on balance, it is preferable to have a repeat of the 1970s than of the 1930s.

To that end, the Federal Reserve will do what it can not only to prevent deflation, but to ensure plenty of inflation. Although the aim is to get consumer prices rising by something in the region of 4% to 6% per annum for a couple of years, if this spills over into 1970s-style double-digit inflation, then so be it.

That’s because the central thinking at the Fed is that while it knows how to deal with inflation and recognizes the problems associated with fairly high rates of price appreciation, embedded deflation is not only more pernicious, but harder to defeat.

“Apparently, the Spanish government finds it completely inconceivable how markets could react negatively to the country’s 20% unemployment and budget deficit of 11.4% of GDP. So they’ve called in the secret service to hunt for an external explanation for markets’ negative impression of the country.”

(via telegraph.co.uk) “I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.”

The “Volcker Wish List” — not a rule, of course, but a high bar of ambition set to be lowered by legislators — includes ending investment banks’ sponsorship and investment in hedge funds. After an initial panic, this element is now seen as a sideshow by bankers compared with the potential impact of constraints on balance sheets, proprietary trading and market share.

It seems that the wish list won’t preclude trading with or on behalf of hedge funds which, bankers say, can often represent 40% of a trading floor’s daily business and sometimes hit 60%.

The new banking restrictions U.S. President Barack Obama proposed last week focus on non-problems and won’t address the issue of systemic risk, according to a former Federal Reserve president who has studied bank bailouts.

“I don’t think it will do an effective job of curbing risk-taking by insured institutions, nor does it take on putting uninsured creditors at real risk, which is absolutely critical,” Gary H. Stern, who served as president of the Federal Reserve Bank of Minneapolis for 24 years before retiring in September, told Dow Jones Investment Banker in an interview.

The proposed rules have the backing of former Fed chairman Paul Volcker, who stood behind President Obama when he announced the measure. Volcker should perhaps know better. He wrote the forward to Too Big to Fail: The Hazards of Bank Bailouts, Stern’s prescient warning of systemic risk published first in 2004 and again in 2008. In that book, Stern and co-author Ron J. Feldman argue that the only way to address systemic risk is to harness market discipline and make sure that creditors price risk appropriately.